Follow Up

The Grinch Stole Christmas, and He's Still Causing Trouble

Holiday sales were sluggish this year, and some analysts see more trouble ahead for the nation's retailers. A look at Barron's 2012 retail picks and pans. And there is plenty of value left in Goldman Sachs shares.

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Holiday sales were underwhelming this year, and the outlook for 2013's first quarter doesn't look any brighter. Craig Johnson, a research consultant and president of Customer Growth Partners, estimates sales rose a paltry 2% in the eight weeks through Christmas. That's below his earlier prediction of a 2.8% increase, shared with Barron's in October (see Preview, Oct. 29), and far below some economists' forecasts of as much as 4.1% growth.

Retailers have blamed the poor showing on superstorm Sandy, which slammed the Atlantic coast in October, and other adverse weather events. A sluggish economy also hurt, as did heightened concerns about Washington's ability to reach agreement on taxes and spending before year end. If Johnson is right, this year's holiday sales grew at half the pace of last year's, and at the lowest level since the financial crisis of 2008. Internet sales were a bright spot; online spending rose 13% year-to-year in the six weeks ended Dec. 16, according to comScore.

JOHNSON EXPECTS THE current period between Christmas and New Year's to be "the most robust of this season," when all the numbers are in. That's largely because of a calendar quirk, with Saturday—the heaviest shopping day of the week—falling on Dec. 29, well before people become preoccupied with New Year's Eve preparations. Additionally, the last week of the year is a big week for what Johnson calls self-gifting, including the redemption of gift cards.

David Berman, head of Durban Capital and a specialist in retail investing, expects the first quarter of 2013, which incorporates the final month of most retailers' fiscal years, to be "very tough" because of a poor weather forecast for the period. Berman, whose DeeBee Index measures retailers on an inventory/sales basis, also cites concerns about higher taxes affecting retail spending, especially on luxury goods.

An unexpectedly steep six-point drop in December in the Consumer Confidence Index is another ominous sign. It fell to 65.1, down from a four-year high of 73.1 in October, which could presage lower spending in the early months of 2013.

"For apparel retailers, the first quarter comparisons for 2013 will be the worst in years," as the weather is expected to be much colder than the unusually mild winter of 2012, says Berman. The DeeBee Report suggests, however, that the women's apparel subsector finally is benefiting from inventory controls. That could be good news for chains such as
Chico's FASCHS 0.5740181268882175%Chico's Fas Inc.U.S.: NYSEUSD16.645
0.0950.5740181268882175%
/Date(1481301322006-0600)/
Volume (Delayed 15m)
:
284764
P/E Ratio
39.595238095238095Market Cap
2138359096.36994
Dividend Yield
1.9242333132892364% Rev. per Employee
110265More quote details and news »CHSinYour ValueYour ChangeShort position
(CHS) and
Ann Inc.
(ANN), which has risen 17% since we checked in on the former Ann Taylor in a March story.

Goldman's In the Sweet Spot

It's been a roller coaster year for shareholders of
Goldman SachsGS -0.31683578380617106%Goldman Sachs Group Inc.U.S.: NYSEUSD240.685
-0.765-0.31683578380617106%
/Date(1481301325435-0600)/
Volume (Delayed 15m)
:
1472327
P/E Ratio
19.05418326693227Market Cap
96012346653.2929
Dividend Yield
1.0872747041358257% Rev. per Employee
959701More quote details and news »GSinYour ValueYour ChangeShort position
(ticker: GS), but with only one trading day left in 2012, the giant investment bank's stock is up 39% for the year. Almost a quarter of that rise took place since our bullish view on the stock was published ("Built To Win," Oct. 1).

With a big gain already in the bag, some shareholders might be tempted to take the money and run. At Friday's close, the shares were $125.52, up from around $90 last June and at the end of 2011. They trade for about 90% of book value of $140.58 a share, and 97% of tangible book of $129.70.

Selling here seems premature, however, as many positives we outlined last October remain firmly in place. Barring some awful fiscal-cliff debacle created by politicians, Goldman is poised to reap the lucrative benefits of its stature as the largest pure investment bank and institutional broker in the business. Despite ever more regulation of the financial-services industry, big companies and asset managers the world over must raise capital and move it around the globe, and Goldman's prowess there is unchanged.

"It's a win-win share," says Aaron Cohen, president of Financial Partners Capital Management, which holds Goldman shares. In an economic revival, Goldman's pre-eminent market position should allow it to gain share and increase its return on equity to perhaps around 13%, Cohen adds. Indeed, ROE has grown steadily for the past four quarters and hovers just below the double-digit percentage level, and the current compensation level of 42% of revenues will come down as the latter rises.

Yet, even if the slow-growth economy and global deleveraging continue, Goldman's cost structure can come down, he says. Under those conditions, banking-industry competitive pressures will allow Goldman to bring down compensation toward that of rivals, such as
JPMorgan Chase's
JPM -0.34774436090225563%JPMorgan Chase & Co.U.S.: NYSEUSD84.824
-0.296-0.34774436090225563%
/Date(1481301326281-0600)/
Volume (Delayed 15m)
:
3152226
P/E Ratio
14.555172413793104Market Cap
304581834359.245
Dividend Yield
2.2743425728500357% Rev. per Employee
421457More quote details and news »JPMinYour ValueYour ChangeShort position
(JPM) 35% of revenue, he says. Goldman's return on assets also should rise, by a third, to 1.2%. Goldman could trade at book value with no industry changes from here, says Cohen.

Goldman's stock remains lower than its 15-year median on a price-to-book and price/earnings basis. Trading volumes are down, but the bank is a leader in most of its activities, and is financially sturdier and less burdened by irrational competition than it was a half-decade ago.

The long-term backdrop suggests global capital flows will increase, which should boost Goldman and its shares. Barron's original view of $140 per share is reachable in 2013, and $145 isn't out of the question, should the industry environment brighten.